Donchian Channel Indicator Calculation, Strategy

Donchian Channel indicator was developed by Richard Donchian. It is a technical momentum indicator that calculates the higher highs and lower lows of a specific period of time forming a channel around those values with upper and lower bands. When Donchian channel is calculated, 20-period highs and lows are considered. Also, a middle line is formed around the midpoints of the channel indicating average value. The channel also shows immediate bottoms and tops of the security price indicating support and resistance zones. Zerodha Kite charts can plot this indicator very nicely for traders.

Donchian Channel Formula:
Channel High = High over selected periods
Channel Low = Low over selected periods

How to setup Donchian Channel indicator in Zerodha Kite?

• Go to MarketWatch.
• Choose the stock you are going to trade.
• Right click on the stock and select chart from graphic icons.
• Chart window of the stock opens.
• Go to studies. Select studies.
• Go to Donchian Channel and click on it.
• A small window opens with default parameters of the indicator.
• Once the parameters are selected the Done command is chosen, the parameters window goes off the screen and the channel is plotted over the stock price.
• By default, the indicator uses 20-period highs and lows for calculations which can be customized.
• Traders can create buy/ sell positions by identifying short term overbought/ oversold positions.
• One should exit the current position once the buy/ sell stop loss is taken off.

How to trade intraday using Donchian Channel?

• The indicator works well in all time frames.
• The picture above shows Reliance stock price movement with the indicator.
• The chart shows 1 min. timeframe.
• A sell position is created when the stock price breaches or touches immediate tops shown by the channel.
• Exit from sell position or fresh buy position is created when the stock price breaches or reaches immediate bottom indicated by the channel.
• In 1 minute or 5 minute charts, traders may find many whipsaws which will be eliminated if longer time frames are used and the Donchian Channel indicator is used with a combination of other indicators.

Traders can use this technical indicator to find out the peaks and troughs of the price pattern. This indicator moves up or down in steps. You can also understand the trend of the market very clearly using the Donchian Channel indicator. When the Donchinan Channel is making steps upside the trend is up and when it is making steps downside the trend is down. A typical usage of Donchian Channel indicator is shown in this trade setup.